Interest rates are set to fall on both sides of the Atlantic amid growing hopes that inflation is back under control

Interest rates look set to fall on both sides of the Atlantic amid growing hopes that inflation is back under control.

Official figures released in the United States yesterday showed that inflation in the world’s largest economy fell from 3 percent to 2.9 percent in July.

It was the first time inflation has been below 3 percent since 2021 and analysts say it “clears the way” for the central bank, the US Federal Reserve, to cut rates next month.

The figures came just hours after the Office for National Statistics said UK inflation rose less than expected in July – from 2 per cent to just 2.2 per cent.

This has fuelled hopes that the Bank of England will press ahead with two more rate cuts this year, having cut rates from 5.25 per cent to 5 per cent this month.

Bond yields, a key measure of borrowing costs in financial markets, fell on both sides of the Atlantic, with the rate on 10-year British government bonds and 10-year US Treasury bonds falling towards 3.81 percent.

According to money markets, there is a 40 percent chance that the Bank of England’s next move will come as early as September.

While the Central Bank and the European Central Bank have begun cutting interest rates again after a series of hikes, the Fed has kept its benchmark rate between 5.25 percent and 5.5 percent for more than a year.

But while there is some chance of a rate cut in the UK next month, investors believe such a move in the US is a certainty.

In fact, the chances of a half-percentage point cut are around 60 percent, although some observers believe a more traditional 0.25 percentage point cut is more likely.

“Unless the global economy experiences another shock, the Fed will likely cut rates by a quarter,” said Jeffrey Roach, chief economist at LPL Financial.

‘The probability of a half-percent increase remains high as investors are somewhat nervous about recent developments.’

Central banks have been reluctant to cut rates, having been criticised for raising them too slowly as inflation spiralled out of control when Covid lockdowns were lifted and energy prices soared following Russia’s invasion of Ukraine.

Andrew Lilico, a fellow at the Institute of Economic Affairs think tank, said the UK data “supports the view that the Bank of England has been too slow to cut rates”.

And Richard Carter of Quilter Cheviot said: “Today’s US inflation figure clears the way for the Fed to initiate a rate cut at its September meeting.”

Charles Schwab UK managing director Richard Flynn added: “This fall reinforces the message that recent jobs figures have made clear to the Federal Reserve: it is time for interest rates to come down.”